Media Wrong about Dollar

CBS wasnt alone. Headlines like The Dollars Decline Does Matter,
Consumers Could Get Caught Under Falling Dollar, and The
Dangerous Dollar were all the rage as Americas currency was
approaching its lows.

Other media also cited the Bush administrations
economic policies as the cause of these declines, with typically
calamitous predictions such as a possible end to foreign purchases
of Americas government debt, as well as blaming the rise in oil
prices on the depreciating dollar:

But for consumers, that medicine could be hard to swallow,
especially if the dollars decline turns into a free fall.
That could spark a run-up in inflation and force the Federal
Reserve to raise rates aggressively, potentially bringing down
the high-flying housing market.
MSNBC.com, Dec. 3, 2004
In what amounts to a vote of no confidence in the U.S.
economy, the dollar has faded against the euro and the yen on
fears that a second Bush administration will continue to do to
the nation what the first did hobble it with a lot more
debt. Los Angeles Times editorial, Nov. 15, 2004

Of course, the broadcast networks were
airing similarly bearish reports as the dollar approached its low
point. Trish Regan of the CBS Evening News said on December 5,
2004:

So foreigners have begun moving their money to places
with better rates of return, and some nations are threatening to
bail out of the US altogether. This could send the dollar into a
deeper decline, putting the brakes on the country's economic
recovery.

Its been almost a year since the media began in
earnest to warn Americans about the falling dollar, and, as is
typical of press predictions, they were wrong. As measured against a
basket of currencies referred to as the Dollar Index which trades
futures on the New York Board of Trade, the American currency has
risen by 15 percent instead of falling precipitously as forecast
last December by many media. Against the euro, it is up 20 percent
to a two-year high.

The press were also wrong about foreigners ending their
purchases of U.S. Treasury paper such as T-bonds and T-bills. CBSs
Regan made a common media prediction regarding the dollar at the end
of last year when she said foreign governments, corporations, and
individuals would get so concerned about its value, as well as
Americas ability to pay back its debt, that they would either stop
purchasing Treasury paper or sell it off. Tom Fenton, also of CBS
News, said this on Dec. 6, 2004:

Who is our government borrowing from? Mostly other
governments, it seems. Foreign central banks now hold 2.3 trillion
dollars (that's $2,300,000,000,000) in American IOUs such as U.S.
Treasury bills and bonds. China and Japan are among the biggest
creditors. If they decided to sell off a substantial part of this
mountain of dollar assets, the dollar would collapse.

We now know that hasnt been the case. In fact, its
quite the contrary, as
reported by the Associated Press in a Nov. 9, 2005, article
entitled Dollar, Near 2-Year High, Continues Rally:

Higher rates boost the U.S. currency by making
dollar-denominated securities relatively more attractive to
investors. Growing foreign investment in the U.S. bond market has
pushed the dollar higher and the euro lower.

The media werent just wrong about the future direction
of the dollar and the end to foreign purchases of U.S. Treasury
paper. They also missed the mark on their forecasts of an economic
downturn. In fact, not only did the dollars value fail to [put]
the brakes on the countrys economic recovery, but, instead, the
gross domestic product grew by 3.8 percent in the first quarter, 3.3
percent in the second quarter, and 3.8 percent in the third quarter.

Curiously, even after the dollar had clearly bottomed,
the media continued to focus on its weakness, as well as espouse
new reasons why its value had ominous portent for the nation.
Mellody Hobson of ABC News said this on Good Morning America on
February 23 of this year:

Well, it affects them in a couple of ways. One, we saw oil go up
yesterday. It's now over $51 a barrel, almost $2 at the pump around
the country. More in certain areas. So, that's a very specific
effect that comes right out of your pocket because oil trades in
dollars. So, when the dollar gets weak, the oil producers raise the
price to make up for the difference.

It was fairly common of the media earlier
in the year to blame rising oil prices on a declining dollar.
However, as the dollar has increased by roughly 15 percent this
year, while oil has increased by about 40 percent, it was obviously
specious to suggest such an inverse relationship existed between the
two.

Americans could learn a key lesson from the medias
poor prediction skills that many professional investors have known
for decades: When the mainstream press begin to recognize a trend in
anything and focus a tremendous amount of attention on it, that
trend is probably very close to being over.

Noel Sheppard is an economist, business owner, and contributing
writer to The Business & Media Institute. He is also contributing editor
for the Media Research Centers
NewsBusters.org.
Noel welcomes feedback at
slep@danvillebc.com.

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